The CO-OP idea emerged when the public option failed to gain congressional support. This alternative accomplished President Obama's goal of creating competition that would “keep the insurance companies honest” without the government having to become the insurer. 

Start-up and solvency loans

As HHS explains on the Healthcare.gov website, the “CO-OP program has a one-time $3.8 billion appropriation to support loans to help set up and maintain CO-OP health insurance issuers. All CO-OP loans must be repaid with interest and loans will be made only to private, nonprofit entities that demonstrate a high probability of becoming financially viable.”

There are two types of CO-OP loans: loans for start-up costs, which must be repaid in five years, and loans to help the CO-OPs meet state insurance solvency and reserve requirements, which must be repaid in 15 years. 

Organizations must apply to receive these funds, and that's what the 35 CO-OPs represented at the NASHCO event were in the process of doing. Just a few days before the meeting, HHS awarded its first grants to seven CO-OPs in eight states: Oregon, Montana, Wisconsin, New Mexico, Iowa/Nebraska, New Jersey and New York. Since then, the South Carolina CO-OP and another CO-OP in Oregon have received funding, too. The statute permits the funding of multiple CO–OPs in any state, provided there's sufficient funding to capitalize at least one CO–OP in each state. Eventually, HHS expects 50 to 60 CO-OPs to receive funding.   

It's a calling

One of the speakers at the NASHCO event was Adam Schwartz, a consultant who works with cooperatives in a number of different industries. He explained that co-ops form “when the market fails to provide a good or service, or fails to provide it at an affordable price.” And that's exactly what they feel has happened in the insurance industry. 

Several of the presenters referred to the “monopolies” or “oligopolies” that exist in a number of states, and they believe CO-OPs can improve private markets by shrinking these existing monopolies. Their goal, according to Mila Kofman, research professor and project director at Georgetown University Health Policy Institute, is to “transform how America finances medical care and services.” Kofman says “a lot of people are sick of supporting Wall Street and want a nonprofit option.” Still, she points out, it will be tough for new-comers to break in.

This is something everyone in the room seemed to agree on. They know the odds are against them, but they feel they're answering a “calling.” More than once, speakers said they essentially wanted to rebuild the Blue Cross Blue Shield system across the country – to get back to what that system was originally intended to do. The founders of the CO-OPs are very mission-driven – money doesn't seem to be the motivating factor.

Level playing field

Barbara Smith, the associate director of the CO-OP Program at HHS, spoke in the afternoon and made it very clear CO-OPs would receive no special advantage over private insurance companies – they will compete on a level playing field. Not only must CO-OPs meet the very strict requirements to receive federal start-up and solvency loans, and demonstrate that the loans are being used appropriately and for the benefit of enrollees, they must also meet the same standards as all other health insurers to be licensed in the states where they offer coverage and, in 2014, meet the requirements to sell health plans through the new exchanges. 

In answer to an attendee's question, Smith did say that the MLR provision does allow for accommodations for new plans that will have higher initial administrative costs, so the CO-OPs will have some time to meet the minimum medical loss ratio requirements. She also addressed concerns that existing payers may use unfair trade practices to maintain their market share. Smith said HHS will be watching to make sure market leaders don't pressure brokers not to place business with the CO-OPs or to send them sick business.

The biggest challenge for the CO-OPs, though, is price. Smith said that being the new kid on the block will get the start-ups some initial enrollees, but that won't be enough – the market is very price-sensitive, so any plan that wants to compete will have to offer affordable premiums.

That won't be easy, though, primarily because of the “most favored nation” status many carriers have with the providers in their market. They get the biggest discounts and therefore are able to offer the best rates. But, as Smith points out, “nothing in the legislation requires that providers give the CO-OPs or any other entity their best contracted prices.” This can be an issue for new entities entering the market – without good reimbursement rates, it's difficult for newcomers to compete.

An opportunity for brokers

CO-OPs also must find a way to distribute their products, and according to Terry Gardiner, vice president for policy and strategy for the Small Business Majority in Washington, DC, brokers will play a “critical role” in these efforts. Gardiner says “brokers have existing relationships and will have an ongoing role with small businesses selling other products,” so he advises CO-OPs to utilize their services: “You don't want them competing against you; you want them working with you.”

Smith echoes this advice. Though there is no requirement for CO-OPs to work with brokers and how (and if) they get paid will depend on their negotiations with the CO-OPs, Smith says CO-OPs “will need to use every tool at their disposal to get enrollments, so they'll probably need to work with brokers and use those relationships.”

She also advised working with navigators and seeking free publicity by letting the local media know what they're doing.

Some final thoughts

There's something refreshing about being in a room full of visionaries – people who not only want but actually expect to change the world. Will they succeed? I hope so, because no matter what the Supreme Court ends up doing, we need some solutions. What I will say is that, after spending a day with these folks, I wouldn't bet against them. 

What the CO-OPs have going for them is the spirit of cooperation. As Richard Miltenberger from the Montana Health Cooperative explained, PPACA expects the cooperatives to cooperate. And through NASHCO, that's exactly what they're doing. They're sharing ideas, best practices and advice for successful loan applications. They're also joining forces to create administrative efficiencies and get better rates on everything from technology to reinsurance. 

The other thing the CO-OPs have going for them is their size. As they say, it's difficult to turn a big ship around, so there are some things that a big insurance company just can't do. But the CO-OPs are smaller and it's easier for them to experiment. Will some fail in the process? Probably. But others might succeed, and if they do, consumers might have some new options to choose from – options that we as an industry have hoped for quite some time. My suggestion for the brokers out there: offer to help. 

Eric Johnson is a longtime contributor to Benefits Selling and the president of ComedyCE.com, a continuing education company whose mission is to make learning fun. He can be reached at 817-366-7536 or [email protected].